Application of Real Options Theory to Natural Gas Monetisation Projects Planning

Nigeria possesses substantial proven natural gas reserves, including significant associated natural gas, offering a pivotal opportunity for national economic development. Despite this potential, the financial viability of associated natural gas monetisation projects, like Combined Cycle Gas Turbine (CCGT) power generation plants and Mobile Small-Scale Liquefied Natural Gas (MSSLNG) processing facilities, has remained a subject of debate, contributing to persistent gas flaring and squandered economic value. This thesis addresses this critical challenge by proposing and applying a novel Hybrid Real Options (HRO) approach to assess the financial attractiveness of these energy projects. The HRO methodology, which explicitly incorporates project design flexibility into the real options framework, was rigorously compared against the traditional Discounted Cash Flow (DCF) method. Through comprehensive Monte Carlo simulations comprising 10,000 scenarios, this research generated robust probability distributions of Net Present Value (NPV) outcomes for various project designs in both MSSLNG processing facilities and CCGT power generation plants contexts. The findings consistently demonstrate the HRO approach's superior capacity to capture the value of managerial flexibility and adaptability under uncertain market conditions, yielding significantly higher and more realistic NPV valuations than the static DCF model. Specifically, the optimal CCGT project exhibited an HRO NPV of $297.46 million compared to its DCF NPV of $67.38 million, representing a 341% increase due to embedded options. Similarly, the optimal MSSLNG project showed an HRO NPV of $6.32 million versus a DCF NPV of $2.80 million, a 125% increase. This disparity highlights the substantial "option premium" attributed to flexibility, particularly in the more volatile electricity market. The research concludes that while both technologies are financially viable and strategically important for Nigeria's gas monetisation, an optimal strategy involves a diversified portfolio approach, leveraging MSSLNG processing facility for localised natural gas capture and distributed energy, and deploying large-scale CCGT plant for foundational national power generation. The HRO framework unequivocally proves crucial for informing robust investment decisions that maximise the long-term value of Nigeria's established associated natural gas reserves in a dynamic environment, offering valuable insights for similar developing economies.